Question 1

If a fund manager has the opportunity to receive a fee as an added incentive to enhance the performance of the fund,the amount of the fee may be based on the extent to which the performance of the fund exceeds an agreed upon hurdle rate of return.Such a fee is referred to as a:

Accepted Answer

This type of fee is known as a "Promote." It is a performance-based incentive given to fund managers for surpassing a certain threshold or hurdle rate of return, encouraging them to achieve higher returns for their investors.

Question 2

During the period before a fund manager begins to physically purchase properties,investors are typically asked to make capital ________.

Accepted Answer

Before a fund manager begins to physically purchase properties, investors are typically asked to make capital commitments, which means they pledge to provide a certain amount of capital to the fund manager when requested. This is different from capital calls, which occur after the manager has identified investment opportunities and needs the capital from investors to make the purchases, and from contributions, which typically refer to ongoing payments or additions to an investment. Assurances do not accurately reflect the process of committing capital to a fund.

Question 3

An office complex was acquired for $1,500,000 in 2014.Cash flows to the investor were received at the end of each year,as follows: 2014 - $250,000; 2015 - $400,000; 2016 - $600,000; 2017 - $600,000.The property was sold for $1,850,000 at the end of 2017.Calculate the IRR for this property.

Accepted Answer

To calculate the internal rate of return (IRR), we need to find the discount rate at which the present value of all cash inflows equals the initial investment ($1,500,000).

Using a financial calculator or Excel, we can input the cash flows and solve for the IRR, which turns out to be 31.6%.

Therefore, Choice C is the correct answer.

Question 4

A property was acquired for $950,000 and then produced cash flows of $100,000,$120,000,$135,000,$135,000,and $125,000 at the end of years one through five,respectively.The property was then sold for $1,200,000 at the end of the fifth year.What was the internal rate of return for this investment?

Accepted Answer

Using a financial calculator, the internal rate of return of this investment is found to be 16.5%. The cash flows are as follows: CF0 = -950,000; CF1 = 100,000; CF2 = 120,000; CF3 = 135,000; CF4 = 135,000; CF5 = 1,325,000 (cash flow from sale of property = selling price - balance owed on property).

Question 5

Which of the following is NOT a measure of risk related to real estate investment funds?

Accepted Answer

TWR (Time-Weighted Return), Beta, Tracking Error, and Jensen's Alpha are commonly used measures of risk related to real estate investment funds. However, TWR is not a measure of risk, but rather a performance measure that calculates the rate of return of an investment portfolio by eliminating the effects of inflows and outflows of cash. Therefore, the correct answer is C.

Question 6

Given the following fee structure,what is the total amount of fees that would be paid to a fund manager if the actual NOI was $45 million annually: 5.5% up to $20 million in annual NOI
5.0% for the next $35 million in annual NOI
4.5% for the next $45 million in annual NOI
4.0% for all over $45 million in annual NOI

Accepted Answer

5.5% of $20 million = $1.1 million5.0% of $35 million = $1.75 million4.5% of $45 million = $2.025 million4.0% of $0 million = $0Total fees = $1.1 million + $1.75 million + $2.025 million + $0 = $4.875 million

Question 7

________ is the rate that causes the present value of all cash flows from a property (including its resale value)to be equal to the original purchase price of the property.

Accepted Answer

The Internal Rate of Return (IRR) is the rate at which the present value of all future cash flows from a property (including its resale value) equals the original purchase price of the property. In other words, it is the discount rate that makes the Net Present Value (NPV) of the investment equal to zero. Therefore, the IRR is an important metric used in investment analysis to evaluate the profitability of a real estate investment. Choice B) NPV is also a relevant concept in real estate investment analysis, but it does not directly answer the question asked. Choice C) TWR (Time Weighted Rate of Return) and D) TVM (Time Value of Money) are not related to the calculation described in the question.

Question 8

________ funds mostly invest in existing operating properties that are stable,with low vacancy and current cash flows and are located in major metropolitan areas.

Accepted Answer

Core funds invest in existing properties that are stable, have low vacancies, and generate cash flows. These properties are usually in major metropolitan areas, which further adds to their stability. Core funds are considered less risky than other types of funds, as they focus on stable assets, and they generate steady income streams for investors.

Question 9

Well-known market indexes,that are adjusted by a margin,serve as which of the following in relation to the expected returns of a fund:

Accepted Answer

Market indexes that are adjusted by a margin serve as benchmarks for the expected returns of a fund. The fund's performance is compared to the benchmark to evaluate how well the fund has performed relative to the market. Target return refers to the specific return goal of a fund, opportunity refers to the potential return available from an investment, and TWR (time-weighted return) is a method of calculating investment performance.

Question 10

When comparing investment returns at the fund level against those at the property level,the difference between them is referred to as ________.

Accepted Answer

The answer of When comparing investment returns at the fund...

Question 11

What is the expected return for a real estate investment fund with a Beta of 1.87,given a risk free rate of 2.7% and an expected return of 11.2% for the market?

Accepted Answer

The expected return can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the given values: Expected Return = 2.7% + 1.87 * (11.2% - 2.7%) = 2.7% + 1.87 * 8.5% = 2.7% + 15.9% = 18.6%.

Question 12

Which of the following is NOT a type of fee commonly charged by a real estate investment fund manager:

Accepted Answer

Acquisition fees are charged for the cost of acquiring assets, disposition fees are charged for the cost of selling assets, and performance fees are charged based on the fund's investment performance. Commitment fees are not typically charged by real estate investment fund managers.

Question 13

Fund flows that occur within a quarterly reporting period are referred to as ________ cash flows.

Accepted Answer

Fund flows that occur within a quarterly reporting period are referred to as intra-period cash flows.

Question 14

For real estate investment funds in which the manager has little control over the flow of cash into and out of the fund,the preferred performance measure is ________.

Accepted Answer

For real estate investment funds in which the manager has little control over the flow of cash into and out of the fund, the preferred performance measure is Time-Weighted Rate of Return (TWR). This is because TWR measures the performance of the fund itself over time, without being affected by external factors such as cash inflows and outflows from investors. TWR is a better measure than Internal Rate of Return (IRR) or Net Present Value (NPV) in this case, as both of these measures are affected by the timing and amount of cash flows into and out of the fund. The Time Value of Money (TVM) is a concept used to compare the value of money at different points in time and is not a performance measure.

Quiz 23: Real Estate Investment Funds: Structure, performance, benchmarking, and Attribution Analysis